The Snowball and Avalanche Strategies of Paying Off Debt

When you have a number of different debts, attempting to pay them off can seem overwhelming. It’s easy to lose track of whether you are making any progress on paying it down: as one account decreases, another balloons out of control. In such a situation, it’s common to feel like you’re tossing money down a bottomless well. However, if you stay organized, energized and focused, you can work your way to freedom from debt. Here are some well-known strategies you can employ to keep yourself on track.

Your Debt Budget

The first step to ridding yourself of debt is to make sure you aren’t living beyond your means and adding to the problem. Before you can pay off any balances, you need to make sure your monthly budget covers your bills, basic living expenses and minimum debt payments. The amount of your income left over every month is your “debt budget.”

Next, cut any unnecessary luxuries out of your lifestyle. Don’t worry, you don’t have to give up luxuries forever, just until your debt is paid off. The goal is to maximize your debt budget by minimizing the number of bills you have to pay.

The Snowball Strategy

The snowball strategy focuses on psychology and motivation to help you pay off your debts. You pay your monthly minimums, then, beginning with your smallest debt, you focus your debt budget on one account at a time. Since you’re starting with the smallest debt, it won’t be long until you have your first taste of victory by eliminating an account balance. This clear success will give you enough confidence to stay motivated about tackling the next debt. In turn, you’ll have even more confidence and focus to wipe away the next account — kind of like a snowball that starts small and slowly grows into a snow-boulder.

The Avalanche Strategy

While the snowball strategy can be successful in keeping you motivated, it doesn’t make the most financial sense. In many cases, accounts with high interest rates will grow and compound while you’re focused on paying the smaller debts. If this is true for you, the snowball method will cost you thousands of dollars more and require much more time than if you had focused on a mathematically-optimal payment strategy.

In the avalanche strategy, you arrange your debts from the highest interest rate to the lowest, regardless of balance and concentrate all your extra funds towards paying down the highest interest debt first. By doing so, you’ll be free of debt much faster than if you had started with the smallest account first, similar to the way that snow accumulates much faster in an avalanche than when rolling a snowball. One caveat: if your debt with the highest rate also has the largest balance, it could be a long time until your first clear “success.”

Which Strategy is Best for You?

If you’re worried that your lifestyle could creep up on you if you don’t experience some early emotional rewards, the snowball method is probably the way to go. However, if your largest debts are on high-rate credit cards, you should probably prepare your inner debt-paying-monk for a disciplined avalanche approach.

For some people, the two methods will be essentially the same: the highest rate debt will also be the smallest. In this case, you’re lucky enough to get the best of both worlds. Your debt will be gone in no time!